Income fund vs RSA retail bonds: Which can offer a pensioner decent interest?

Without knowing how much you need on a monthly basis to cover your living expenses, it is difficult to advise the most appropriate investment for your lump sum.

I’m a 70-year-old widow. I’m currently doing caring work in the UK because I need the income.

I have approximately R2.3 million which I have to live off the interest of. This is very little, so I really need a decent interest rate.

The RSA retail bonds are at 8.5% now but then one needs to tie your money up for five years. However, one can enjoy higher rates as they go up by restarting your five-year term.

I thought perhaps I should go into an income fund that performs well. I looked at the Mi-Plan Enhanced Income Fund and it looked well established and well-performing. I was in fact on the verge of investing with them but was shocked recently when the daily performance was -1.7%. It was across the board of most income funds, but I was so surprised to see that there was such a big fluctuation in a single day.

This worried me so I thought I should get some professional help before making my decision. I would be so grateful if you could help me in this regard.

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Thank you for your question. Your concerns are ones that we come across on a regular basis in our industry and unfortunately, there is no ‘silver bullet’ answer to help you in your decision-making process. We find the best way to assist people in similar situations is to help them understand the risks associated with investing in the various asset classes and then, importantly, help them marry this information with their personal objectives in order to make a more educated decision.

As we do not have full insight into your personal circumstances, we are somewhat limited in how we answer this question, so our aim is to provide you with some insights for consideration and highlight potential areas of concern.

When it comes to investing for the long term, inflation can be a harmful enemy. Generally speaking, most investors need their investments to beat inflation in order to increase the purchasing power of their savings over time. Without knowing how much you need on a monthly basis to cover your living expenses, it is difficult to advise the most appropriate investment for your lump sum.

We understand that, while you are currently working and generating an income, there will come a point when you are no longer able to work and will need to rely on your invested capital. If you choose an investment strategy where your capital is locked away and you receive a fixed percentage income, this may work in the short-term but not necessarily over the longer term. This is because, as inflation goes up and your cost of living increases, the income you receive from this investment will lose value over time and will not be sufficient to cover your monthly expenses. This, in turn, will result in liquidity problems for you. In addition, you need to consider what will happen in the event of a financial emergency if your capital is tied up and inaccessible.

It is important to note that the SA Bond market has been the best performing asset class over the last five years. Having said this, remember that past performance does not necessarily predict the future, and no one really knows what is going to happen in the future.

However, if you analyse investment performance over a long enough timeline, patterns do appear – and we can use these patterns to get a better idea of what can be expected in the future.

History tells us that in the long run, investors can expect the following approximate returns from the four different asset classes:

  • Cash: Inflation
  • Bonds: Inflation plus 1-2%
  • Property: Inflation plus 5-6%
  • Equities: Inflation plus 6-7%

As you can see, cash and bonds are considered more safe and defensive asset classes, whereas property and equity would be your aggressive and growth assets classes. In theory, the more cautiously you invest, the more certainty and less volatility you have compared to the more aggressive investment options.

As you have seen from your own research though, investing isn’t as simple as just picking one. There are varying investment options available – each with its own set of risks. For example, while one might not associate an income fund with being volatile, it can be impacted negatively given certain economic situations. Tax is also an important consideration when choosing an appropriate investment, keeping in mind that each asset class creates different tax implications. Funds that invest in cash and bonds could potentially result in you paying additional income tax, whereas funds that invest in property and equities could result in you paying dividends and capital gains tax.

In closing, I wanted to share a rudimentary example of why your investment strategy is so important. Assuming you require to drawdown R15 000 per month from your R2.3 million, and that the drawdown needs to increase by inflation each year, should you invest in a fund that only targets inflation-like returns, your funds would last 12 years before being depleted. On the other hand, should you invest in a fund targeting returns of inflation plus 4.5% and it was able to achieve those targets each year, your funds would last 17 years – which is an additional five years. It is important to remember that to achieve those returns, the fund would need to have exposure to property and equities which, of course, are a lot more volatile.

My advice would be that you need to see your financial advisor to have your financial needs and situation analysed in more detail. This needs to be done so that various investment scenarios can be presented to you in order to make a better-educated decision. It is always advisable to have a portfolio that is matched to your needs, and one that sits inside your appetite for risk.

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Since you’re working in the UK, you may have access to ISAs (tax free investment accounts which you can invest in shares, bonds, etc) up to GBP 20000 per year. Similar to SA tax free savings accounts but these allow much less invested per year (R36000). The answer given by the FA didn’t seem to state recommended or guideline percentages of your capital to invest in shares, bonds, property, cash etc but I imagine you need your capital to last at least 15 if not 20 years from now at age 70. So while some should go in shares to earn higher returns over a 5-10 year period than the other asset classes, certainly not all. A good balanced fund would address this. If you’re going to be based in South Africa, you might consider opening an Easy Equities online account, and investing a fraction of your capital in something like Vanguard S&P500 unit trust. The advantages of that are very low fees (unlike going through an advisor), the benefit of the rand depreciating against the USD when you sell and bring the returns back to SA, and over a long period (5 years or more) it should give good investment returns in USD terms. Of course, if you envisage needing the invested money much earlier than that, then it’s risky to invest in shares

Have you considered bank fixed deposits. I have just looked at one of the big 4 and they are offering 8.5% nominal on fixed deposit over 5 years. I am assuming that you are tax neutral so this would give you an income of around R16000 per month.

If you do go the unit trust route then I suggest that you look at one of the big well established names such as Ninety One, Coronation, Allan Gray.

Hi, which Bank is offering 8.5% nominal at this point for 5 years?



I looked at FNB but the others should be similar

If you can leave your capital untouched for at least 5 years or longer invest R1m in a Global Equity Feeder fund and R1m in an Income fund. Emergency access to your capital must always be taken from the Income fund. Your tax position will also be much improved. Capital gains tax on the offshore investment is only taxed after 1.R40k exemption on the capital gain and 2. then 60 % of the amount after the R40k deduction is included in your taxable income. After 5 years or longer switch funds annually from Global equity to Income fund within the CGT exemption.

Is the inclusion rate not 40%

For income RSA Retail savings bonds 8.5 % interest received monthly. 5 year term. Fixed deposits with banks interest normally on termination.

Incorrect. I receive monthly interest payments on my bank fixed deposits

Tx which bank, what rate do you get and for what period?

In reply to Lez. Standard Bank. Rates from 8.2 to 10.2 for 5 years taken out some time ago. That 10.2 % has turned out to be a very good investment when measured against all market instruments over the past 3 years. Have not checked on their current 5 year rate but it would be similar to FNB who are quoting 8.5%

Will not buy RSA retail bonds on principle ,whatever rate they offer : You are essentially supporting the ANC to steal even more as these funds go into the fiscus . Never !!

I’m with you here, but I suppose some other don’t care.
Just like I won’t support SAA ever either.

This might come across as short sighted but here goes.

You’re 70, have R2.5M and still feel you need more? I’m saving for retirement. I started at 25. My plan is to retire at 55. According to the fancy calculators finance houses have built in on course to replace my restated (exclude bond & car repayment) income. When I do retire and start enjoying my money I’ll do my level best to not try and stretch the money. At some point one has to live life. And you, at 70 with that much in today’s money should be living. Cut off your kids and grand children if needed and live.

Sadly now a days R2.3 million is only a moderate amount for retirement. This will only give you around R10k pm if you want to draw sustainably from a well diversified portfolio. A 70 year old can easily live another +20 years so inflation will be a big risk, especially for medical and accommodation costs. As someone who has been retired for 7 years I can tell you that stretching your retirement savings as far as possible is essential.

You seem a bit naive mate… Based on my discussions and chats with my financially literate mates as well as a proper financial planner I will need somewhere between R25-35m when I retire.

That number is quite large and quote scary. The sooner you start saving the better!

It is indeed shortsighted!!
R2,3 M at age 70 is not great .

2.5 is nothing lol

Just a quick word of warning to make sure the rate the bank is quoting you is comparable to the asset class returns mentioned in the article or by some of the commentary.

Often the banks will advertise a rate which is calculated using simple interest – basically calculated as an average return as follows:

You lend me R100. After 5 years I will pay you R150 back. R50 return on R100 is 50%. 50% divided by 5 years is 10% per year.

But if you actually look at the compounded returns R100 invested for 5 years earning 8.45% has a value of R150 after five years. This 8.45% is the rate you need to be using to compare to the annualised returns from the asset classes mentioned above.

One final point – retail bonds and fixed deposits should not carry any admin costs. But if you buy am income fund or unit trust you have to use a platform which often carries an admin fee. This will reduce your income yield. Some platforms of course will waive the admin fee if you are using their own funds of course.

If you don’t have some offshore exposure you are as dead as mutton. Offshore via a UT Feeder fund is the easiest to do. 50% in an Offshore feeder fund and 50% in an income fund. Bank fixed deposits are based on simple interest. Income fund interest is based on compound interest which will give a better return than bank deposits.

From your article:

Equity : inflation plus 6 – 7
Funds targeting inflation plus 4.5%

In the current context that is almost double inflation (the 4.5%) and more than double inflation the 6-7%.

My question, when in history did equity deliver double inflation for a sustained period.

This inflation plus approach is foolish, at best expecting inflation plus 2%. Because that is already 33% above inflation

Just did some sums. JSE Top40 – 4.5%/annum. Nasdaq100 – 38%; S&P500 – 13%. Also includes currency devaluation but numbers don’t lie.

End of comments.



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